Why Long-Term Investors Should Bet on This Retail Stock

The equity could benefit from a short squeeze

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Discount retailer Big Lots, Inc. (NYSE:BIG) is up 0.3% to trade at $44.03 at last check. The security has pulled back dramatically from its June 9, all-time high of $73.20, though the shares seem to have recently found a floor at the $44 mark. Meanwhile, the 40-day moving average has been pressuring the equity lower since early July, contributing to BIG's 12.5% year-over-year deficit. 

BIG 40 Day

The brokerage bunch is firmly bearish towards Big Lots stock, with all eight analysts in question calling it a "hold" or worse rating, indicating there's plenty of room for upgrades. Meanwhile, BIG's 12-month consensus target price of $52.78 is a 19.9% premium to its current perch. The equity looks ripe for a short squeeze, too. Short interest rose 12.8% in the last two reporting periods, and now makes up 18.5% of BIG's available float, or over one week's worth of pent-up buying power.

A shift in the options pits could also create tailwinds for the security. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BIG's 50-day put/call volume ratio of 1.01 sits higher than 95% of readings from the last year. This means long puts have been getting picked up at a much quicker-than-usual pace.

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.70 sits in the 96th percentile of readings from the past 12 months. In simpler terms, short-term traders have rarely been more put-biased.

Big Lots has grown its revenues 17%, and has seen its net income increase 37% since 2018. Although the retailer is growing sales and profits at a relatively slow rate, the stock provides an attractive valuation and dividend yield. BIG has a price-earnings ratio of 6.25 and a price-sales ratio of 0.27, both of which are extremely low. This makes it difficult to imagine Big Lots stock could trade at a lower price in the near or far future.

The company's biggest fundamental issue is its weak balance sheet. Big Lots holds just $293 million in cash, and has $1.74 billion in total debt. Nonetheless, BIG continues to be a decent option for long-term investment, based on its valuation and fundamentals.

 

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